We attended LAFMSIA’s FY15 results briefing, which was well attended by about 30 participants. We came away feeling neutral, as we opine that the positive prospect from the Kanthan and Rawang capacity extension from 2H16 will be negated by intense price competition in the industry. Post briefing, we reiterate our UNDERPERFORM call with unchanged TP of RM8.44, based on Fwd. PER of 24.4x on Fwd. EPS of 34.6 sen. The PER valuation is based on the 5-year historical mean level.

4Q15 results recap. Management recap that 4Q15 revenue performed better than 1Q15 revenue mainly due to higher cement revenue (+7.1% to RM718.3m). Bottom-line wise, core net profit shrunk (-24.7% to RM42.2m) mainly attributable to an one-off Holcim acquisition expense. Meanwhile, management guided that dividend payout moving forward is targeted within the 90-100% range, which is in-line with our targeted dividend payout of 92% for FY16-17E.

Kanthan and Rawang plant capacity extension on track.Management updated that the 1.2m metric ton (MT) cement plant capacity extension progress is on track and is expected to be completed by 2H16, which we have accounted for in our earnings estimates. While we expect higher cement revenue from the capacity extension (FY16E: +11% YoY), we expect moderate growth in core net profit margin to 9.6% (from 8.5% in FY15), as we expect higher fixed cost per unit of cement produced in FY16E.

Expecting demand from infrastructure sector to outweigh residential sector. For FY16, management expects the slowdown in residential demand to be compensated by stronger demand from infrastructure sector. While we like that the group has cost saving synergy and stronger presence in Johor post the LafargeHolcim merger (additional 1.2m grinding plant facility in PasirGudang), we believe the award of infrastructure-related projects might kick in later-than-expected, given current economic situation, hence we remain prudent in our estimates.

Maintain UNDERPERFORM with unchanged TP of RM8.44. While we expect higher revenue contributions from the Kanthan and Rawang plants from FY16E onwards, of which we have taken into account, we remain concerned on the sector’s fundamentals following persistent price competition amongst cement players, partly due to the expected additional 14.0% capacity increase in Peninsular Malaysia until FY16. Moreover, the current FY16-17E core PER of 26.0-24.0x indicates rich stock valuations, which compels us to uphold our UNDERPERFORM recommendation. Hence, we maintain our TP of RM8.44, based on unchanged Fwd. PER of 24.4x on Fwd. EPS of 34.6 sen, as we made no changes to the earnings estimates. The PER valuation is based on the 5-year historical mean level. 

Source: Kenanga Research - 3 Mar 2016